OGC Opinion No. 09-01-07
The Office of General Counsel issued the following opinion on January 13, 2009 representing the position of the New York State Insurance Department.
RE: Proposed Retirement Asset Protection Policy
Question Presented:
May an insurer market in New York a policy intended to protect the value of a retirement account in the event of divorce?
Conclusion:
No. The proposed product would constitute a kind of insurance that may not be written in New York. In addition, it arguably constitutes an impermissible form of group coverage.
Facts:
An entity is in the process of developing a new insurance product - a retirement asset protection policy (“RAPP”) that is designed to provide an asset manager (e.g., bank, financial services firm, insurance company, mutual fund company, or plan administrator) with an insurance policy to protect and preserve (a) the value of a customer’s individual retirement account and (b) the value of an asset manager’s overall portfolio of retirement accounts held under management against the unexpected and unforeseen diminution thereof due to a division, distribution or transfer of the account resulting from the termination of a customer’s marriage by divorce.
The policy is in the nature of a claims-made cover under which a benefit is paid upon proof of a loss to the “Named Insured.” The “Named Insured” under the RAPP is the asset manager of the retirement account. The individual customer is identified as the “Principal.” The Principal is not an insured and has no rights under the policy. Potential coverage under the RAPP is triggered by the Principal or spouse filing a notice of divorce (e.g., summons, petition, or complaint of divorce) during the policy period. The payment of a benefit is contingent upon (a) the issuance of a final order of divorce (e.g., legal decree, judgment, or order) and (b) the division, distribution, or transfer of a protected account to the former spouse. The benefit would be paid to the Named Insured for the account of the Principal and would be equal to the cash value of such division, distribution, or transfer, not to exceed 50% of the total cash value of the protected account, and subject to a maximum benefit payment of $1 million per divorce.
Analysis:
The RAPP clearly qualifies as insurance under the Insurance Law. N. Y. Ins. Law § 1101 (McKinney 2006) defines an insurance contract, in relevant part, as follows:
(1) "Insurance contract" means any agreement or other transaction whereby one party, the "insurer", is obligated to confer benefit of pecuniary value upon another party, the "insured" or "beneficiary", dependent upon the happening of a fortuitous event in which the insured or beneficiary has, or is expected to have at the time of such happening, a material interest which will be adversely affected by the happening of such event.
(2) "Fortuitous event" means any occurrence or failure to occur which is, or is assumed by the parties to be, to a substantial extent beyond the control of either party.
Under the operation of the RAPP, a pecuniary benefit (restoration of account balance) is paid to the Named Insured for the benefit of the beneficiary (Principal) upon the happening of a fortuitous event (divorce). The Principal has the material interest in the fortuitous event, given the potential loss of retirement savings that can result from an equitable distribution or other court order as a consequence of a divorce. The Named Insured, by contrast, lacks a true material interest in the subject matter of the covered property.
While a given type of coverage may constitute insurance, the determination of whether it may be offered for sale in New York requires that it either be classified as one of the thirty-one distinct kinds of insurance enumerated in Insurance Law § 1113(a), or be concluded to be “substantially similar”1 to one of the foregoing. The inquirer asserted that the RAPP should qualify as either involuntary unemployment or salary protection insurance or, in the alternative, as a form of insurance substantially similar to either of them.2
Insurance Law § 1113(a)(30) and (31), respectively, define involuntary unemployment and salary protection insurance as follows:
(30) "Involuntary unemployment insurance" means insurance against the loss of income due to the involuntary loss of full-time employment which is the result of an individual or mass layoff or employer termination, a temporary suspension or permanent cessation of employment or a business failure.
(31) "Salary protection insurance" means insurance against financial loss caused by the cessation of earned income due to disability from sickness, ailment or bodily injury, in an amount up to: (A) that portion of an individual's annual earned income which is in excess of the amount of in force disability insurance as defined in paragraph three of this subsection in an amount not to exceed seventy-five percent of the individual's annual earned income in total based upon the sum of the in force disability insurance and salary protection insurance when the benefits are payable to the individual or the individual's beneficiary; or (B) where such underlying disability insurance cannot be obtained by an individual from an authorized insurer, in an amount not to exceed seventy-five percent of the individual's annual earned income when the benefits are payable to the individual or the individual's beneficiary. Any insurer licensed to write disability insurance as defined in paragraph three of this subsection may also write salary protection insurance as defined in this paragraph.
RAPP does not qualify as either of the foregoing kinds of insurance. Involuntary unemployment insurance was added to the Insurance Law by Ch. 326, L. 2004 and by definition it specifically covers loss of income from an involuntary cessation of employment. RAPP coverage, by contrast, provides for an augmentation of a retirement account balance in the event that the account balance is reduced by operation of a domestic relations order incident to divorce. For the same reasons, RAPP coverage is not substantially similar to involuntary unemployment insurance.
Salary protection insurance was added to the Insurance Law by Ch. 626, L. 2006. Such coverage essentially functions as supplementary disability income insurance (i.e., a form of health coverage) on account of “sickness, ailment or bodily injury”. RAPP coverage does not resemble this form of coverage, and is not substantially similar thereto, either.
In addition, the RAPP presents another significant concern. 11 NYCRR Part 153 (Regulation 135) establishes minimum requirements for group policies and quasi-group programs. Section 153.1(g) defines group policy to mean, in pertinent part:
1) A policy underwritten on a collective basis of:
(i) property/casualty insurance insuring the interests of two or more persons or entities; …
Although the Principals are not named as insureds, it is clear that they are the real parties in interest under the RAPP. The coverage would be marketed as being provided in conjunction with their retirement accounts. Further, as noted above, the Named Insured has no material interest in the retirement accounts of the Principals. Accordingly, the RAPP provides coverage to the Principals and hence would be a group insurance policy. Although New York law recognizes certain types of group insurance policies, see Insurance Law § 3220 (group life insurance), § 3221 (group accident and health insurance), § 3445 (employer sponsored group excess property insurance) and § 3446 (product or system group property insurance), the RAPP would not come within those types of permissible group coverages. Consequently, the RAPP appears to amount to an impermissible group insurance policy.
In sum, the proposed RAPP coverage does constitute insurance, but it is not a kind of insurance that may be written in New York. Accordingly, the policy form would not be approved for sale in New York.
For further information you may contact Supervising Attorney Michael Campanelli at the New York City office.
1 Insurance Law § 1113(a)(32) provides: (32) "Substantially similar kind of insurance," means such insurance which in the opinion of the superintendent is determined to be substantially similar to one of the foregoing kinds of insurance and thereupon for the purposes of this chapter shall be deemed to be included in that kind of insurance.
2 During the course of the Department’s review of the RAPP, the Department’s Office of General Counsel (“O.G.C.”) also considered whether the RAPP can be properly characterized as financial guaranty insurance as enumerated under Insurance Law § 1113(a)(25) and defined by Insurance Law § 6901(a). O.G.C. concluded, however, that because the RAPP does not protect against a decline “in the value of any specific assets or commodities' as described by §6901(a)(1)(D), it does not constitute a financial guaranty product.